Infinite Banking vs RRSP, TFSA & RESP: How Strategic Whole Life Enhances Tax-Advantaged Accounts in Canada
One of the most common questions I get when people start learning about Infinite Banking is this: “Does this replace my RRSP or TFSA?”. The short answer is no.
The longer, more important answer is that Infinite Banking is a process concerning how you finance the things you need in life, and who benefits from that act. These tax-advantaged accounts are not designed to handle that function. Where the crossover happens is with the utility that exists inside of a participating whole life policy and redirecting funds from tax-advantaged accounts towards a policy. Once you understand what a properly structured policy can do, you naturally start to challenge the restrictions limiting the utility of these tax-advantaged accounts. You can simultaneously finance the things you need in life, and save for retirement. One feeds the other through utility.
What I mean by the utility within a participating whole life policy is this. The cash value (equity within the policy) grows completely tax-free, much like in a TFSAs and better than RRSPs and RESPs. However, there are no restrictions or rules that govern the build-up or the access of the funds. You stay in control the entire time through the build up and the income phases without putting limits on how much you can contribute.
Where the major distinction between these accounts and a policy exists is with how we access money. With tax-advantaged accounts, you must withdraw the money in order to access it. When withdrawing the funds, you interrupt their growth, and in regards to a RRSP or a RESP you trigger a taxable event. This immediately puts a limit on long term growth.
With a policy, you can access funds by leveraging its worth. You can take a loan from the life carrier for up to 90% of the available cash value at any time, or you can collateralize the cash value with a bank for tax-free income for life. This means you can access funds without interrupting compounding at any time, for any reason, meaning you won’t outlive your money.
This is the true power of utility. Retirement savings can be used to fund a university degree allowing you to pool retirement and school savings into one vehicle and increase the total capital over time. The same funds can be used to cover off emergency expenses, finance vehicles, and family vacations. This means that instead of creating many smaller piles of money designed for very specific things, we can pool our money together, maximize the amount we are compounding over time, and access money when we need it. Just like any other pile of money, once we access it, we pay it back and refill the pot.
How the growth happens within a policy is very different and also worth discussing. The growth within a policy is contractually guaranteed because the cash value must equal the death benefit at the life insured’s age of 100. This is different from those accounts where the growth is tied to market conditions and relies on investing your money to grow. What this means is, there is zero risk during the accumulation phase. There is no scenario where you build up a sizable account balance and have a recession wipe out your purchasing power. The growth within a policy is completely outside market conditions.
Restrictions on Tax-Advantaged Accounts Compared To A Policy
RRSPs
RRSPs are often positioned as the foundation of retirement planning. You contribute pre-tax dollars, investments grow tax-deferred, and you pay tax later when you withdraw. This works well on paper, but in real life, RRSPs come with trade-offs that most people don’t fully consider.
Once money goes into an RRSP, it is effectively locked away. If you withdraw early, the withdrawal is taxed as income and permanently loses contribution room. Even when you convert to a RRIF, withdrawals are mandatory and taxable, regardless of market conditions.
This creates a strange dynamic. You may have hundreds of thousands of dollars on paper, but very little flexibility. Using RRSP money today often means sabotaging tomorrow.
RRSPs must be converted into a Retirement Income Fund (RIF) no later than the end of your 71st year of age so the government can collect its share of your money in the form of taxes. Plain English, you don’t control the terms surrounding accessing your money. This is not where you want to be. You want absolute and total control of your money when you are in a state of being most vulnerable to losing it.
What you are trading is a tax break now, in the hopes that your tax bracket will be lower in the future when you access money. This is short term thinking and that’s the opposite of the ideal approach when dealing with finances.
There is also an assumption that you will be in a lower tax bracket in the future. This again assumes that taxes won’t increase in the future. That is very unlikely due to historical trends and due to the amount of government spending that happens today. When governments create a deficit in the budget, they pass the bill on to future tax payers.
With a policy, you have complete control over how and when you access your money, without interrupting its growth. There are many ways we can access the money, some of them come with tax consequences, and some that are completely tax free.
You have the option of withdrawing funds from a policy. This is not recommended as it creates a taxable event, and reduces the amount of coverage that you have. Next you can elect to receive the dividend as a cash payment. This is a better option than a withdrawal, but still comes with a taxable event, and you are restricting future growth of the policy because the dividends are no longer being reinvested into the policy to buy additional death benefit.
Next we can take policy loans. These remain tax free until we have exceeded the Adjusted Cost Basis (ACB) of the policy. The ACB can be thought of as the value of a policy in the eyes of the CRA. Its purpose is strictly for calculating taxable events. It can be found by looking at your online portal for your policy or asking your advisor.
Lastly, we can collateralize the loan with a conventional bank and annuitize it. This means we are going to receive money from a bank completely tax free for the rest of our lives. In exchange, the bank puts a lien on the policy and will recoup the amount that was loaned to us, plus interest, when we pass away. However, the growth in the policy is not being interrupted even while we draw an income from the bank. This is the most efficient use of the policy in passive income time.
So while these two in theory work very well together, in reality what we see is people stop contributing to their RRSPs and redirect those funds towards funding a policy instead. This is because over the long run, a policy gets more effective while an RRSP gets less effective. Then, when people want to invest in the markets, they can take a policy loan to do so to capitalize on the opportunities that arise without trading future growth to do so.
RESPs
RESPs are designed to be a very specific type of vehicle. The upside is the government grants that come with them, the downside are all the rules restricting access to the money. Plus, once you access the money for school, the product goes away and all growth stops.
This is an inefficient way to plan in the future. The upside of the grants does not outweigh the restrictions placed on the use of the money. You give up even more control than RRSPs. If the goal is to save for a child’s future, don’t limit yourself to only being able to use the funds for post-secondary education.
The younger generations are much more entrepreneurial than ever before. With the rising costs of tuition, more and more kids are going to forgo university and start building their own companies. If you have saved using a RESP, you will be taxed heavily when you withdraw the money to fund a start-up for your kids.
A policy has no such restrictions. A policy with the child as the life insured never limits the growth on the cash value within the policy. Just like with the RRSPs, our experience is that people start to divert away from RESPs once they understand the upside of a policy. A policy just gives you much more flexibility and utility in the long run.
TFSA
Out of the three tax advantaged accounts, the TFSA is by far the best option. The only real downside of the TFSA is the contribution limits. Just as a properly designed whole life policy should be a cornerstone of your financial portfolio, a TFSA should be as well. They work very well together.
Instead of withdrawing TFSA funds and interrupting growth, policy loans can be used for spending while the TFSA stays invested. Over time, this preserves tax-free growth and increases total lifetime returns. Think of the TFSA as your growth engine, and Infinite Banking as your access engine. Each does its job without cannibalizing the other.
How you use a TFSA when you have policies in place however can change. Because you have risk free growth within the policies that is going to continue to compound over time, you can be much more aggressive within your TFSA. You can take bigger risks, attempt to get bigger returns and maximize the use of that tax-free account because you know your foundation is extremely solid.
Final Thoughts
How you prepare for your financial future is always your decision to make. There are so many strategies and tools to help you get to your goals. What we value and what we teach is control. Where tax-advantaged accounts falter is with long-term control.
Should you choose to keep using these three accounts, adding in a well-designed policy is only going to enhance their effectiveness. Like I said in the intro, Infinite Banking is all about how you finance the things you need in life. When you take back control of that function, you also simultaneously build an asset that can assist you through every phase of life, including well into retirement.
However, if you are at all concerned about the restrictions that exist within these accounts, a participating whole life policy can do everything they can, and even more.
